LDK Solar (LDK) announced Q4 results on February 25th that beat analyst estimates on both revenue and earnings. The forward guidance was a little light compared to analyst projections. The stock price went up during after hours, only to settle after the earnings conference call. This is a repeat scenario of the occurrences after third quarter results were announced too.

Below is a look at some exchanges during the conference call that highlights the incompetence of management and analysts alike.

Exchange 1 – Jesse Pichel, Piper Jaffrey:

Jesse Pichel, Piper Jaffrey: You said Raw Material is at 856 MT. What is that number when adding transit consignment and production. If I divide the inventory figure by $176, I get about 1900 MT. Jack Lai, CFO: Explained the fact that Raw Material does not equal inventory and the fact that it is a futile exercise to convert back from ingot numbers and come up with an “adjusted” raw material number.

Jesse Pichel, Piper Jaffrey: What was the free cash flow for Q4? Can you update us on capex for ’08? How much for ingot/wafer operation and for the poly plant?

Jack Lai, CFO: We are operating cash flow positive.

Jack then went on to explain certain spending plans expected for the coming year and the company’s funding plans without going into specifics…

Jesse Pichel, Piper Jaffrey: Can you quantify it? – You said the expenditures for the poly plant would be around $400M and $200M for wafer capacity.

Jack replied with more capex details without committing to specifics. Jesse at this point asked whether the original answer was that LDK is cash flow positive or operating cash flow positive. Jack confirmed they were operating cash flow positive. Jesse then asked whether Jack had that number. Jack said we could discuss it after the call. Jesse seemed to push the idea away by murmuring something and then went on to ask about the item on the balance sheet that says “inventories to be processed beyond one year”. Is it included in the inventory number and is it in the Cost Of Goods Sold (COGS) calculation? Jack replied with a random answer about purchasing difficulties. Then went on to present the fact that the silicon powder won’t get used for a year and that is the reason that the company decided to put it under non-current assets and it is not in COGS calculation.

Nicola Sarno, VP operations: Breakage rates are inline. Some customers cannot do this. The important thing is industry moves in that direction to saves silicon.

Jack chipped in by stating that they are projecting more than 100% growth and are setting the right expectation to meet or exceed guidance.

Cheryl Tang, Goldman Sachs: What is the subsidy per watt?

Nicola Sarno, VP operations: We don’t have that number. 40c/Kilo-watt is the agreement with the government. Everything above that is subsidy. For poly, it will be 75c/Kilo-watt.

Exchange 3 – Satya Kumar, Credit Suisse:

Satya Kumar, Credit Suisse: a) Will it perhaps be more conservative to write down above 1-year inventory instead of capitalizing it? Will you consider taking a write down? Also, has the auditors signed off on this practice?

Jack Lai, CFO: Accounting is normal. Because of tightness in market, when we have an opportunity to purchase, we buy it independent of whether we need it immediately. Another question about inventory vs raw material reconciliation followed and they agreed to discuss it offline.

Satya Kumar, Credit Suisse: In the second line item on the asset side of the balance sheet, “pledged bank deposits”, is it available for Capex?

It depends on maturity. It is spread out as 3-month, 6-month, 9-month, and 1-year maturity levels and as they mature the cash becomes available for immediate use.

Comments:

LDK projected EOY 2008 polysilicon capacity at 7000 MT and EOY 2009 capacity at 16000 MT. Given that LDK’s expenses are very high for polysilicon procurement, it is high time analysts modeled scenarios that attempt to predict profit margin going forward based on the fact that polysilicon will be sourced internally. Interestingly enough, none of the analysts showed any interest in getting details on polysilicon production costs. The call got bogged down on trivial matters and questions that pointed to backward-looking analysis. Granted that, coming up with forward-looking scenarios accurately is not very easy to do but not even attempting to discuss such issues is incompetence.

Jack Lai, the CFO demonstrated a tendency to give unrelated answers. When responding to certain questions he came back to the point later in the reply but on other occasions, analysts ended up having to prod him. Jesse Pichel, the Piper Jaffrey analyst couldn’t hide his animosity as evidenced in the latter part of the exchange (Exchange 1). Further, the questions he posed about inventory vs raw material and whether LDK was cash-flow positive were both irrelevant: The former was an attempt to spawn doubts about inventory accounting and the latter a veiled attempt at suggesting LDK will be faced with a cash crunch later this year. He should know that cash won’t be an issue given LDK’s cash-on-hand, profitability, and pledged bank deposits. Cheryl Tang, the Goldman Sachs analyst was especially clueless with her questions about who is responsible for the risks associated with increased breakage rates with thinner wafers. Nicola Sarna, the VP of operations ended up having to give a lecture on industry direction and the need for thinner wafers. Satya Kumar, while sounding innocuous was ruthless suggesting the company should consider writing off the inventory slated in the ‘more than one year’ category.

The inventory issue, which first surfaced after the whistle blowing by Charley Situ, was brought up indirectly by a number of analysts. Also, Jesse Pichel put out an analyst note suggesting, "This classification would appear to validate some earlier investor fears that the company holds unusable inventory". This suggestion only confirms Jesse’s preconceived bearishness, given the company elaborated the process by which inventory is categorized.

To summarize, LDK Solar needs to clean up its act when conducting these calls. Also, given the open animosity certain analysts are demonstrating, LDK Solar might be better off giving less verbose answers rather than trying to elaborate. Further, it might be a worthwhile exercise for the company to look at who represents them in these calls and making sure it is conducted in a professional manner.

An analysis of LDK Solar based on the public information available will follow.

1 comment
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Extremely well written analysis of the CC. I was very disappointed in the answers given by management. While I am able to excuse the 3Q CC for lack of understanding from a young company, you would have thought they would have learned their lesson with the negative response to it. Pichel is as jaded an analyst as I have ever come in contact with on numerous confrence calls, and the anomisity he holds for some reason unbeknownest to me (could it be because LDK dropped PJ as an investment banking client?) is evident in everything he asked as well as in the inflection in his voice on the call. The fact that he hadthe gall to "congratulate" them on a great quarter and then lower his price target was all the evidence necessary. Well done, I look forward to your anlysis of the company in the follow-up.